By Heikki Vesikansa (Partner and Head of Tax), Jenni Parviainen (Managing Associate), and Stefan Stellato (Managing Associate), Hannes Snellman Attorneys Ltd., Helsinki
On April 7, 2022, the Court of Justice of the European Union (CJEU) issued its ruling in case A SCPI v Veronsaajien oikeudenvalvontayksikkö (C-342/20). In its ruling, the CJEU found the Finnish rules for granting tax exemption to investment funds to be contrary to the EU free movement of capital. The Finnish rules categorically exclude from tax exemption foreign investment funds that are organized in company form, while Finnish investment funds are always contractual (i.e., not legal entities).
Finnish Tax Exemption for Investment Funds
The Finnish system for avoiding double taxation on investments through mutual funds is based on income tax exemption on the investment fund level. The unitholders are taxed on distributions from the investment fund and disposals of fund units.
EU fundamental freedoms require Finland to extend this tax exemption also to foreign investment funds, which are comparable to Finnish tax-exempt funds.
Until 2020, comparability of foreign investment funds wasn’t regulated in tax legislation. Instead, comparability was determined based on a case-by-case assessment.
As of 2020, the criteria for tax exemption have been codified in a new Section 20 A of the Income Tax Act (ITA). Formally, the criteria for tax exemption applied without distinction to Finnish and foreign funds, meaning that Finnish funds must also meet the tax-exemption criteria. However, one of the criteria is contractual form, which causes Finland to categorically exclude foreign investment funds organized as companies from tax exemption, whereas under law, Finnish investment funds can only be set up in contractual form.
According to the government bill, the new Section 20 A aimed to improve tax predictability and legal certainty by precisely identifying the circumstances in which a foreign investment fund can be treated as equivalent to a Finnish tax-exempt fund and thus be granted tax exemption. In addition, the intention was to ensure undistorted competition by placing Finnish and foreign investment funds in a similar position.
Circumstances
In the case, a French investment fund planned to invest in Finnish real estate. The French fund was organized as a variable-capital property investment company (société civile de placement immobilier à capital variable), managed by A Asset Management SAS (société par actions implifiée). In France, the investment fund was exempt from income tax, while shareholders were taxed on distributions and disposals of fund units.
The fund requested a binding preliminary ruling from the tax administration, to confirm the tax treatment of any profit from the Finnish investments in tax years 2019 and 2020.
For the tax year 2019, the Tax Administration considered the company to be comparable to a Finnish tax-exempt investment fund. Thus, the fund was exempt from tax on its Finnish profits.
However, for the tax year 2020, the tax administration concluded–based on the new Section 20 A of the ITA–that the fund could not be treated as tax exempt. Instead, the fund should be treated as a foreign corporation, subject to 20% corporate income tax on its Finnish profits.
The company appealed the 2020 decision to the Administrative Court of Helsinki, arguing that the new Section 20 A of the ITA is contrary to EU law. The Administrative Court referred the matter to the CJEU.
The Ruling
The CJEU agreed with the taxpayer and concluded that Section 20 A was contrary to the free movement of capital under Articles 63 and 65 of the Treaty on the Functioning of the European Union (TFEU).
The CJEU found the provision to be de facto discriminatory. Although the criteria formally applied without distinction to domestic and foreign funds, in practice, Finnish funds would always meet the requirement of contractual form, while foreign funds would not. Requiring a specific legal form would render EU law ineffective.
The CJEU also considered the situations of Finnish and foreign investment funds to be objectively comparable. Both aimed to avoid double taxation of collective investments.
Conclusions
The CJEU’s ruling has a significant impact on the tax treatment of foreign company form investment funds, which have so far not obtained tax exemption. Foreign investment funds that have been taxed on income from Finland, due to their legal form, should now assess tax-refund potential for tax years both before and after the 2020 amendment.
The CJEU’s ruling is a natural continuation to its earlier ruling (C-480/19) Veronsaajien oikeudenvalvontayksikkö (Revenus versés par des OPCVM), which concerned a mirror situation. In that ruling, the CJEU essentially ruled that a Finnish private individual, who received distributions from a Luxembourg company form fund, could not be subject to higher taxation due to the fund’s legal form.
As a result of the ruling at hand, the Finnish legislator will also have to amend Section 20 A to comply with EU law. The CJEU has now stated that the provision, which arguably intended to align Finnish tax treatment with EU law, is against EU law. This confirms the concern presented by many commentators during the legislative preparatory phase that requiring contractual form would violate EU law.
The question of legal form has been before the Finnish courts before. For example, the Central Tax Board’s (CTB) ruling 2017:34 did not extend Finnish tax exemption to a Dutch collective real estate investment listed on a stock exchange and exempt from income tax in the Netherlands. The Supreme Administrative Court (SAC) upheld the CTB’s ruling. Neither the CTB nor the SAC respected the taxpayer’s request to refer the question to the CJEU. The Administrative Court’s decision to refer the case at hand to the CJEU can be applauded.
- Heikki Vesikansa is Partner and Head of Tax, Jenni Parviainen and Stefan Stellato are Managing Associates at Hannes Snellman Attorneys Ltd., Helsinki.
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